How to settle with a debt collector

Brigitte Yuille

That bill has been sitting at the bottom of your paperwork pile for a while, and despite your best effort, ignoring it hasn't made it go away.

Now you've acquired somebody who wants to be your new best friend, a debt collector.

You can't wait any longer to face it. In fact, many credit experts say too often consumers dodge the opportunity to resolve their money issues with the debt collector when they should.

"If you know you lost your job and you don't have the money to pay your creditors, don't be reactive, be proactive," says Robin Holland, spokeswoman for Equifax, a credit reporting agency.

But many people don't know what to do when it comes to working out a deal with a debt collector. The following questions could help.
True or false?
• An account sent to collection can be deleted from your report.
• Paid-in-full accounts are better than settled ones.
• You can be sued after the statute of limitations ends.
• Credit card charge-offs can't be deleted from your credit report.
• If you have a debt in collections over $2,000, you won't be sued.

True or false:
An account sent to collection still can be deleted from your credit report.
That's true. A deletion is possible, but that doesn't mean all creditors will agree to it, cautions consumer credit attorney Edward Jamison, of the Jamison Law Group P.C., in Los Angeles, which specializes in helping consumers get their credit ratings restored.

Even if the collection agency agrees to a deletion, it's only of limited value.

Maxine Sweet, spokeswoman for Experian, explains that if the deletion letter came from the collection agency, only the collection account would be removed. The original credit or account from the creditor would remain on the report.

"The original creditor can verify to us that the original debt was an error and should not have gone to collection and instruct us to remove both the original account and the collection account," Sweet says.

Jamison explains the creditor deletion gets rid of the account completely. This, in turn, "helps the credit score because it is like it never happened, where a paid collection means you were not creditworthy in the past."

He advises that if the consumer is able to get a deletion, have the letter faxed stating the terms. For instance, it could say: "I, ABC Collection, agree to delete John Doe's collection account with the account number 1854642 in return for John Doe paying X dollars." Make sure it's signed by someone at the company.

But, the consumer can't demand a deletion without reason, warns Pamela Baird, a collection attorney for Lacy Katzen LLP in Rochester, N.Y.

"If it's disputed and they investigate it and they find the debt has been reported in error or inaccurately, they delete it," she says. "They are telling the credit reporting agency they want that trade line taken off the consumer's credit report."

Craig Watts, public affairs manager at Fair Isaac Corp., believes some creditors don't often provide deletions because it can be deceptive.

"One of the main reasons lenders do business with credit bureaus is because lenders want a better view of the risk involved in extending credit to any individual," he says. "Deleting a collection account from a person's history is not in the best interest of the lender because such information is important to a fair assessment of the person's credit risk."

True or false:
Paid-in-full collections are better than settled.
Depends on who you ask. If it's not possible to get the account removed from the report, Jamison suggests settling. He believes this move can prevent the resale of your debt, prevent a lawsuit and alleviate damage to your credit report and credit score.

Collection agencies will act as the middlemen during the deal, says Jill Jensen, director of Omnium Worldwide Inc., a collection agency. She says Omnium's clients, which include banks, credit card companies and phone companies, will define the parameters for settling.

"The client will have payment criteria, for instance, on when the account can be paid, what kind of terms can be offered and in what situations the agency can offer the settlement," she says.

For example, she says, a client may tell the debt collector, "The options we have are payment in full or no more than three payments spread over 90 days."

Jensen says the client will expect Omnium to gather enough information about the consumer to decide how much to deviate from the preferred payment in full.

"If the customers' financial situation is such that other terms might be appropriate, we would act as the conduit to the client and seek permission to set payment terms or settlement outside of that area."

If you choose to settle, do so for as little as possible, Jamison cautions.

"It's better to save 50 cents on the dollar and lose a couple points off your credit score by having a settlement as opposed to 'paid-in-full,' because the collection and the charge-off notation is what's hurting the account," he says.

Watts explains, "As far as the FICO credit risk score goes, the paid-in-full status is going to have little, if any, affect on the person's score."

True or false:
You can be sued after the statute of limitations period ends.
True, technically, says Baird, but only if you reaffirm the debt.

Generally, the statute of limitations is the amount of time the debt collector can take legal action. This action can include a lawsuit or having your wages garnished. The time period is set by individual states.

American Collectors Association International, or ACA, a trade association of third-party debt collection businesses, says the statute of limitations is longest for documents that have been notarized by a notary public, while it is shortest for actions on open or revolving accounts such as credit card debts.

The countdown begins on an accounts' last activity, according to ACA. It can restart with a partial payment or a written promise to repay, which reaffirms the debt, depending on the state law.

It's suspended if a consumer leaves the state or is sent to prison. However, the statute doesn't prohibit the collector from going after the debt, it just prevents the collector from taking any legal action, such as filing a lawsuit or garnishing wages.

Jamison says any time the statute of limitation is passed, you probably don't want to settle.

If you choose to settle beyond the statute of limitations, Jamison believes the company is more likely to agree to delete the account with payment since the company knows it can't use a lawsuit.

Jensen says Omnium doesn't sue most of the debtors it deals with.

"The legal process takes time. Most of the accounts we get, we don't have the period of time to sue," she says. "We do occasionally file suit when somebody has the ability to pay, but refuses to pay."

She says the agency can determine the person's ability to pay by seeing if he or she is employed. Or, the agency may review the person's financial situation by looking at the person's credit report.

Jamison offers this reminder: Don't verbally agree with the collector on the phone or send in a payment even for a dollar, because the statute of limitations will start all over again.

True or false:
Credit card charge-offs can't be deleted from your credit report.
False. It's possible. But that doesn't necessarily mean it will happen.

Jamison says it's unlikely to be deleted if you are dealing with a big bank, which probably won't give you a deletion letter.

"Reason being, the companies are too big and they have too much red tape that you have to circumvent to be able to get somebody that can make a judgment call to give you a deletion with payment."

Baird disagrees. "If the creditor has a reason to delete a reported debt then they are going to delete," she says. "Saying that creditors are not deleting because it is not efficient is not accurate."

True or false:
If you have a debt in collections over $2,000, you won't be sued.
False. Jamison warns when collections get over $2,000, the collection agency is more likely to sue before the statute of limitation ends because there's a lot of money at stake.

Baird agrees.

"Most creditors look at the dollar amount to determine whether they will sue," she says. "They look at whether the person is working or not, whether they own a home or not, the cost of commencing a lawsuit and state-specific avenues for collection related lawsuits and collection."

Jamison hypothetically uses the $2,000 amount because the extra money needed to pay the debt in full may not benefit the consumer as much in return.

"If the person can afford to, I suggest paying in full in return for a deletion for accounts that are $5,000," he says.

If the account is for a credit card, Jamison says the settlement will depend on how much the person intends on using the card in the future. If the consumer uses it a lot, he advises the consumer to be willing to pay a higher amount to delete. That's if the deletion can be negotiated.

When it comes to collections less than $2,000, Jamison suggests getting a deletion is better than getting a deal. Calling the collection agency to settle for 50 cents on the dollar won't work because he believes the agency won't agree to a deletion with payment. Instead, he advises paying the full balance in return for a deletion letter, especially if the consumer is concerned about his or her credit report and credit score.

Baird warns if you do pay in full for an account that may have been charged-off, the creditor is under no obligation to delete the account. However, the creditor must report that it is "paid in full."

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